Tokenized Securities: A Treatise – The SaftLaunch Team – Medium

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Blocked Unblock Follow Following SaftLaunch offers individuals and professionals a platform to connect with companies issuing SAFT agreements and ICOs with secure accreditation and KYC/AML. Mar 1 Tokenized Securities: A Treatise Traditional ICOs are dead, long live the tokenized security. Today, almost anyone who knows anything about finance, from institutional investors to tech-savvy consumers, has…

Blocked Unblock Follow Following SaftLaunch offers individuals and professionals a platform to connect with companies issuing SAFT agreements and ICOs with secure accreditation and KYC/AML. Mar 1 Tokenized Securities: A Treatise Traditional ICOs are dead, long live the tokenized security. Today, almost anyone who knows anything about finance, from institutional investors to tech-savvy consumers, has a basic understanding of how an ICO (Initial Coin Offering) functions. ICOs originated from an ambitious goal: to issue tokens that would economically align community members within decentralized networks.

Since 2013, numerous well-known projects, such as Ethereum, have used the ICO model to raise capital for revolutionary development work.

Just shy of five years ago, app creators began issuing tokens within small communities, from websites or in chat rooms. Soon after, several companies and entrepreneurs jumped on the bandwagon. Lawyers, marketers, and advisors eventually joined in as well, and the ICO became a Wall Street business.

By the end of 2017, ICOs had raised over $4 billion in capital. While new investments in enhancements to blockchain technology will continue to disrupt the market, those who will see the biggest return will need to issue new tokens as compliant tokenized securities. A Brief Explanation of Decentralized Networks: A decentralized network describes a group of computers that run the same software simultaneously. Because decentralized products, such as Bitcoin, are not hosted on one server, but on many servers simultaneously, there is no central point of failure or control.

Think of anything valuable that you store, whether it is money in a bank, or your search engine history on a personal Google account. For better or worse, one company often has centralized control over our most valuable items. Since decentralized networks operate on a network consensus, and require wide user-consent to change the code base, users have assurance that products will run as originally designed.

By decentralizing products, such as banking or internet searches, value storage becomes a more transparent, predictable, and secure process, while guaranteeing users sole access to their property.

Furthermore, decentralized networks are economically incentivized to offer more competitive products and operate more efficiently than their centralized counterparts. Users of these decentralized products compensate the network with a small fee of tokens when transacting. Similarly, profit incentivizes traditional companies to create and improve the products that users demand — incorporating more speed, more efficiency and more privacy. Additionally, there is also a key difference between making changes to a company’s products versus adjusting a decentralized product. While the executive board of a given company can change that company’s product at any time, with or without customer and company-wide consensus, in contrast, any change to a decentralized product must always first be approved by network consensus.

Additionally, crypto-users gain from the reciprocal investment on the part of developers, who also own decentralized network tokens, such as BTC. In order to ensure the network’s utility justifies its token value, developers who are also cryptocurrency owners are compelled to continuously upgrade the same network’s open-source code.This win-win incentivization has attracted major talent to networks: the brilliant minds behind Bitcoin and Ethereum are a perfect example.

Occasionally, when members of a given network want to adjust the network’s product without consensus, they can copy the existing code into a new network (a process known as “forking”). Forking creates a mirror of the original decentralized product, with the addition of the members’ desired improvements. In fact, the reason forking occurs is precisely because adjusting a network’s existing code is so hard to do. The innate challenge in amending this code ensures that users enjoy a sound guarantee of a software product’s reliability and accessibility. Thus, the integrity of the code and its execution as originally intended within a network is also essential for the success of any digital currency or security. Defining Utility Tokens: “Utility tokens,” are the network-supported decentralized assets offered in ICOs. Utility tokens are a groundbreaking concept. A given token builds a community of users around it, who can own and control their product, molding it into an asset they believe in and which meets their needs.

These tokens can generate tremendous value from the network effect of users with organic demand for their utility (e.g. Ethereum, Bitcoin — and imagine if Google search had issued an app token!).

Since utility tokens are usually issued on publically known protocols, any application, including a decentralized application (Dapp), that offers utility can easily search blockchain records to prove who owns its utility tokens. On the other hand, securities require banking relationships and high barrier-to-entry processes in order to prove ownership. While decentralized token developers can grant their users ownership privileges and active participation rights, most end-users only dream of having such control and influence over their user-based products. Developers can design applications to grant token holders privileges (such as discounted commissions on a decentralized exchange), voting rights, key decision making opportunities, and if done compliantly , equity and profit sharing . For example, in a decentralized exchange, a utility token can allow users to access special features such as offering leverage to other users, free trading, voting on token listings, and the option to decide on major design features, elect managers, and establish use of proceeds.

Sometimes these tokens will even offer monetary rewards to users, such as a percentage of revenue from profits or mining fees. Through these added participation bonuses, utility tokens holders become super users, acting as a preferred consumer, product designer, and equity partners.

Utility Tokens vs. Securities: The Great Debate For the most part, utility tokens are no longer issued for open-source software development or for running networks. Rather, in many cases, utility tokens have directly adopted the method of a traditional security offering (essentially an IPO) in order to raise capital. As such, the utility token of most ICOs today does not resemble the utility token of the days of yore (think 2013–2014) in which the sole goal was to economically align users within decentralized networks. And because so many of these tokens look, act, and smell like equities, at SaftLaunch/RenGen/Prism Holdings we believe these tokens should also pay their investors like equity investments. Unfortunately, many of today’s utility tokens should probably not exist because they lack intrinsic value. For example, businesses issuing tokens with no logical or realistic use cannot expect to reach the network effect of a successful consumer application.

Every utility token’s failure discredits crypto capital markets, shakes investor confidence, and may negatively affect the long-term viability of these markets.

However, some of these issuers have a propensity to generate real revenue, and investors may benefit from a hybrid token that combines profit sharing with utility. Furthermore, there is no legal definition for a utility token in the U.S. and in most other countries. Indeed, issuers seldom sell utility tokens in accordance with securities laws.

The issuing company typically sells these tokens directly to investors, meaning that tokens are issued to whomever (read: absolutely anyone) sends cryptocurrencies as payment.

To avoid creating a security, many issuers deliberately do not issue tokens with profit-sharing or other equity-like characteristics. To issue a token with profit-sharing or equity features, which we feel most utility tokens should offer, issuers must release tokens in compliance with global securities laws. For example, tZERO’s issuance on SAFTLaunch was the first compliant ICO because the tokens were sold in compliance with existing private placement laws. We expect there will eventually be an SEC ruling on the status of utility tokens, but the risk of a negative outcome is a risk most traditional long-term investors are not used to taking and probably will not take. Because of these risks, there is a lot of short-term investment in utility tokens that is exaggerating many of those tokens’ market value. When the legal questions about utility tokens are finally answered, we expect a number of utility tokens offering true value to perform exceptionally well (this is why we HODL), but a majority of them with no real use and no true value will depreciate quickly. In the United States, the SEC has taken the view in several recent announcements that utility tokens are securities. The U.

S.’s stance matches the prevailing view of regulators in other countries like Canada, Switzerland, and China.

While the SEC’s view of these tokens does not answer the question of their status, we believe this perspective on utility tokens-as-securities is something that wise issuers will duly note. The Future: Security Tokens So, what is a security token, anyway? Security tokens have a number of unique features. Like their less well-defined sibling, the utility token, they offer the same access to application features, but they can also legally pay dividends and represent equity. In keeping with tokens’ disruptive tradition, security tokens can do everything utility tokens are meant to do, while conforming with existing securities laws.

They are run by the same decentralized networks (such as the Ethereum network), and allow access to applications, can offer pro-rata management rights, voting, and even income distributed via smart contract. We believe these features make security tokens the appropriate framework for Vitalik Buterin’s proposed DAICO (or, “decentralized autonomous ICO”), improving the ICO model to form entity-based Decentralized Autonomous Organizations (DAOs) and disrupting the traditional notion of a corporate entity.

Under Delaware law, most aspects of the DAO can work well using tokenized securities. With a bit of elbow-grease and a lot of planning, a DAICO can also deliver significant value to investors in specific business models — and this idea is part of our mission. Below, a brief overview of how security tokens differ from utility tokens: Compliance: The laws around securities are clear and defined.

In contrast, there are no regulatory laws related to utility tokens yet–and it’s possible there never will be. That means that if the SEC is able to prove that utility tokens are securities, issuers may eventually be at legal risk. Issuance: Security tokens can also be issued in a variety of ways. For example, SaftLaunch issuers issue security tokens in accordance with Regulation D of the 1940s Act, which means that the platform only accepts accredited investors. Most non-U.

S. countries also require investors purchasing privately placed security tokens to be accredited. To be an accredited investor in the U.S.

, an individual must have an annual income of $200k or more or at least $1mm in assets. Each country has its own laws for accreditation. To have your country added to SaftLaunch’s list of researched and approved countries, you can email . Hold Time: Accredited investors in the U.S. may not sell security tokens to unaccredited investors for 1 year. Additionally, accredited non-U.

S. investors may not sell security tokens to U.S. unaccredited investors for one year.

According to U.

S. law, non-U.S. investors may trade security tokens freely with one another. However, every investor is subject to his or her own country’s laws, which advisors and issuing platforms must understand. Trading: Security tokens must be traded on a securities exchange, or “peer-to-peer” (traded directly between two investors).

In the U.S., securities exchanges must be registered with securities regulators.

tZERO’s ATS would be an example of a registered trading venue. Most non-U.S. countries require that securities trading is done on a regulated exchange. Non-U.

S. investors in securities tokens usually may trade directly with each other.

Very few ICOs so far have offered security tokens. tZERO, an ICO launched by Overstock.

com, represents the first security token offering that is not a fund. tZERO’s token is by far the largest token offering that has been issued in accordance with actual securities laws. The tZERO token was structured, advised by, and issued on SaftLaunch.com. Co-advisors were SAFTLaunch, Alchemist, Poly-Math, and Area52. Protections and Entitlements: The ideals behind utility tokens began with a unique principal: that coding entitlements and protections into a network-run decentralized application both guarantees and makes those protections unalienable.

But in most cases of ICOs, the utility tokens do not represent any smart contract-enforced rights, nor are utility token holders afforded any legal recourse. In contrast, securities usually must be structured in ways that protect both investors and issuers. Such entitlements can often be found in the issuer’s operating agreement and offering memorandum. But one of the most unique aspects of decentralized networks is programmatic enforcement of entitlements and rules. Since securities tokens are technologically identical to current utility tokens, smart contracts can also enforce securities tokens entitlements, such as revenue sharing, with both centralized and decentralized applications.

Functionality: As we mentioned above, utility tokens and securities tokens are functionally the same. However, in addition to offering utility, securities tokens can legally offer securities-like features, notably the distribution of dividends, profit sharing, and/or equity. Conclusion: Utility tokens are revolutionary, disruptive, and represent an incredible movement in social and economic history. However, as these tokens have entered the mainstream, their original mission has evolved. As a result, almost all tokens that presently call themselves utility tokens should actually be issued as securities.

Most of these tokens have no real utility and in order to raise capital successfully, future issuers will need to incorporate economics (equity, dividends) and utility. Issuing tokens in accordance with securities laws protects both issuers and investors, allowing new ideas to continue to flourish in this burgeoning space. From an investor’s perspective, there is no significant difference in investing in a utility token vs. in a tokenized security, except that investors must be accredited, trade on securities exchanges (such as tZERO or UberDelta), and U.S.

investors must hold investments for one year instead of for several months, as is the case for utility tokens. Finally, security tokens have the potential to bring a whole new level of issuers and investors to the crypto space. Public companies, venture capital firms, banks, and other institutions can all get involved once these tokens’ regulatory framework is clear. — About SaftLaunch: SaftLaunch, founded in 2017, is currently the only platform to have issued a securities token for a public company. Public companies in the U.

S. are subject to much closer scrutiny than most startups that have been issuing ICO tokens. SaftLaunch’s investor on-boarding process is specifically designed to anticipate increasing compliance regulations and regulatory scrutiny in general. Disclaimer — Please Read: Our Website is not a broker/dealer, we are not an investment advisor, we have no access to non-public information about any companies or tokens, and the information in this article is not financial advice, advice concerning investment decisions or tax or legal advice. No content on our site or in our articles constitutes — or should be understood as constituting — a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in our site content. We do not provide personalised recommendations or views as to whether an investment approach is suited to the financial needs of a specific individual. The value of tokens and investments and the income derived from them can go down as well as up Investors may not get back the amount they invested — losing all initial investment is a real risk Past performance is not a guide to future performance.

Our content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on our Website or in our posts and wish to rely upon, whether for the purpose of making an investment decision or otherwise.

The materials available at our web site and in our articles are for informational purposes only and not for the purpose of providing legal advice . You should contact your attorney to obtain advice with respect to any particular issue or problem. .

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